29th August 2018
The tax benefits of ISAs are compelling. Being able to grow investments tax-free is a no-brainer and in addition to this, investors can also benefit from higher returns over time with compounding interest. These advantages make ISAs a very obvious tool for individuals to provide for their own financial future and grow their net worth.
The cash ISA’s popularity cannot be disputed, with the total funds held in 2016/17 being a record £585 billion. However, traditional cash ISAs, as well as stocks and shares ISAs, can be either too conservative or too risky for everyday investors.
In response to this, the Government has introduced a number of new ISA products over the last few years to encourage savers to increase their uptake. These include the Innovative Finance ISA (IFISA), the Lifetime ISA (LISA), and the Help To Buy ISA.
Each of these was designed with their own distinctive benefits. Having said this, it appears that the IFISA is the only one which has real staying power because of its high returns coupled with the ability for investors to utilise their full £20,000 allowance.
Lifetime ISA
The Lifetime ISA has been in operation since April last year and is open to anyone between the ages of 18 to 39. It allows investors to add up £4,000 of savings each year with the government topping this with a 25% bonus until the account holder is 50.
While it has been largely designed as a scheme to encourage people to save towards a house, it is a relatively restrictive product as investors are hit with a 25% penalty on the total if funds are used for any other purpose.
More recently, it has also come under criticism due to how the government applies the bonus element: during the last tax year, it was added at the end of the period, but in 2018/19 it is being calculated monthly. This has resulted in a number of LISA providers restricting investors to transfer their funds, due to confusion about whether bonuses due have been applied.
Help To Buy ISA
First introduced in 2015, the Help To Buy ISA has some similarities to the LISA in that it is also targeted at those trying to get onto the property ladder.
It allows savers to invest £200 a month, with a maximum amount of £12,000 to be deployed into accounts. When accounts are closed, the Government then applies a 25% bonus up to a maximum of £3,000.
The highest performing Help To Buy ISA accounts currently offer a return of 2.56%. So, A full year’s Help To Buy ISA would generate an annual return of £302 per month, assuming the maximum £200 is invested each month in an account carrying this return. While this outstrips the rate of returns offered by cash ISAs (currently around 1.35%), it is markedly lower than IFISA providers.
The Innovative Finance ISA (IFISA)
The IFISA was launched in April 2016, and unlike the Lifetime and Help To Buy ISAs, allows for the full £20,000 yearly allowance to be invested.
For one, this type of ISA benefits multiple parties and facilitates economic growth. Funds are invested into debt crowdfunding and P2P platforms, providing small to medium businesses with much-needed growth capital, while investors can expect much higher returns than traditional savings methods.
Crowd2Fund was the first platform to be IFISA approved and currently offers an APR of over 9%. While defaults are a normal and expected component of investment activity, the current default rate on the platform is 1.42%, which is significantly below the industry average.
If looked at purely from a returns basis, the IFISA is a more compelling than the other new ISA products because of its more generous annual limit, alongside higher percentage returns. If a full £20,000 was invested into an IFISA at the start of the tax year, it would generate £1,800 with an APR of 9% with no defaults– an extremely handsome return.
While the uptake of the IFISA is relatively small amongst more mainstream ISAs, its growth is likely to continue thanks to proven higher returns with low levels of defaults and an increased availability of data. This will solidify the credibility of the P2P lending sector as a whole, and as more people take advantage of the benefits of an IFISA, we can expect to see more innovation from prospering British businesses as a result.
The last publicly released stats on IFISAs revealed Crowd2Fund as having 40% market share.
